For more information about Vanguard funds or Vanguard ETFs, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

All investing is subject to risk, including possible loss of principal.

I will not make you wait for my thesis, advisors: Intuition and nostalgia are enemies of your clients’ investment success—and, therefore, of your business success.

For your mutual benefit, you should shun investment choices based on intuition and nostalgia and look for opportunities to replace them with sound investment habits.

The trouble with intuition

Intuitively, we believe we get better products and services when we pay more for them. This perception may be accurate in most facets of life, but the relationship breaks down when it comes to investing. In fact, lower-cost investment funds consistently outperform higher-cost alternatives.¹ The former leave more money in our portfolios, to grow when financial markets gain value.

There may be multiple explanations for such disappointments. A few that resonate with me include the tremendous competition among money managers, a large share of whom are highly intelligent and well-informed about economic and financial market developments—circumstances that help to ensure that “staying on top” in the performance derby is a huge challenge.

We also see that when there is strong relative performance of an investment style or category, it often accompanies higher current valuations from the inception period of the investment category, making repeated outperformance or its magnitude of outperformance or both challenging at best.

“It is what it is.” You may have heard this phrase a time or two in recent years. Perhaps you’ve said it yourself. If the remark has become worn from overuse, it nonetheless makes a useful point about the limits of our abilities.

We cannot control Federal Reserve policy, market interest rates, stock market valuations, or many other factors that influence investment outcomes. It’s responsible, of course, to regularly consider how investment conditions have evolved, but there’s a line somewhere between attempting to soberly assess potential risks and rewards and stubbornly waiting for the return of the “good old days.”

Replace intuition and nostalgia with productive habits

There are things we can control as investors, and your clients may be surprised at how powerful they can be.

We can make investment plans, establishing goals and diversified portfolios that might help us reach them over time.

We can take into account our tolerance for risk and our time horizons, recognizing that our retirements could last for decades—and that the horizon for some of our money could be even longer if, for example, we intend to leave some of it in a trust for our children, grandchildren, or favored charities.

We can keep our investment costs low, thereby leaving more money in our portfolios to compound into larger sums in the event of market gains.

We can save more.

We can rebalance our portfolios to target weights that have nothing to do with the current consensus on market valuations and everything to do with our risk tolerance and goals.

We can resist the urge to act on economic and market headlines, which seldom have anything to do with us.
And we can learn to expect the unexpected and to get comfortable with the uncomfortableness that comes with the volatility and risks that are the primary reasons risk premiums exist.

When you counter clients’ natural attraction to intuitive or nostalgic approaches to investing and convince them of the wisdom of controlling the powerful levers they can control, you are reframing investor choices. It’s a form of what we call behavioral coaching—one of the best services you can render.

Fran Kinniry

Francis M. Kinniry is a principal in Vanguard Investment Strategy Group, whose primary responsibilities are capital market research, portfolio design, development and implementation of customized investment solutions, investment market commentary, and research. The group's proprietary research on investment, economic, and portfolio management issues has been published in leading academic and practitioner journals. It also is responsible for establishing Vanguard's investment philosophy, methodology, and portfolio construction strategies. Mr. Kinniry has worked extensively with ultra high net worth families and institutional investors, creating customized portfolio solutions for their investment needs. He also initiated the Vanguard Investment Counseling & Research department and Vanguard Asset Management and Advisory Services. Before joining the company in 1997, he was a partner and senior portfolio manager for Executive Investment Advisors, Inc., an institutional asset management firm. Previously, he was a portfolio manager for H. Katz Capital, a venture capital and hedge fund manager. Mr. Kinniry has more than 20 years of experience in the industry and is a regular speaker on investment, economic, and portfolio management issues. He is a Chartered Financial Analyst® charterholder and earned his M.B.A. and bachelor's degrees from Drexel University.

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For more information about Vanguard funds or Vanguard ETFs, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

All investing is subject to risk, including possible loss of principal.

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